Banks Will Welcome the Delays Foreclosure Reviews Cause

Megabank JPMorgan announced today that it is suspending current foreclosure proceedings. Some of its employees may have been signing off without personally reviewing the files. This follows an announcement last week by Ally Financial, formally known as GMAC, which is halting its foreclosures for essentially the same reason. If their documentation has not been reviewed properly, then lawsuits could follow -- which is why banks would be concerned. And if these two major mortgage issuers have this problem with their foreclosure proceedings, then others probably do too. But is this as bad for banks as it sounds?

Ultimately, it's fairly likely that these foreclosures will still take place. After all, if these individuals aren't making mortgage payments, and the banks can prove ownership, then foreclosure is pretty inevitable. This is more just a matter of proper procedure, with these banks wanting to be sure they have all the right boxes checked throughout the process. So in the long run, it's highly unlikely that these delays will significantly affect the quantity of foreclosures that these banks process.

But in the short run, the banks might actually welcome the delay. It's no secret that banks have been foreclosing on borrowers quite slowly since the housing market collapsed. This could be partially due to administrative difficulties involved with the huge flood of defaults. But siome market observers suspect that banks are intentionally trying to keep the inventory of homes the market sees artificially low to prevent prices from declining more quickly.

Really, these delays by JPMorgan and Ally will achieve that same end -- the proceedings will take even longer. If these banks put into place new procedures that delay foreclosures further going forward, then they may benefit from not having to declare associated losses as quickly. Delays will also allow more existing inventory to sell off before introducing additional repossessed homes into the mix. And considering how weak the sales of homes have been since the government credit expired, it's the perfect time to delay additional foreclosures from adding to the inventory.

That's not to say that these banks are purposely instituting foreclosure reviews for the expressed purposes of delaying losses and keeping housing inventory low. It could be a coincidence that they are announcing these delays at the same time home buying demand is the weakest it's been in at least a decade. Considering the ultra-low rate of sales, however, it's not likely that they're particularly bothered that it will take a little longer for these homes to hit the already bloated housing inventory.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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